Stock markets across the world have reached new peaks, driven by softer-than-expected US data and widespread belief that the Federal Reserve will in September.
It’s an eye-catching rally that has lifted sentiment far beyond Wall Street, with European and Asian equities also riding the wave.
But rallies built on expectation can be fragile. This one is no exception.
The timing of this surge matters. August is historically a month when market dynamics can distort the picture. Lower trading volumes mean each trade has a greater price impact.
Portfolio managers often adjust their positioning before the autumn, which can drive short bursts of buying or selling. Sentiment can swing sharply on relatively small pieces of news. This is why I see this as a rally shaped as much by seasonal influences as by a deep, durable shift in fundamentals.
In the US, the S&P 500 closed at 6,445.76, the at 21,681.90, and the Dow at 44,458.61. Small caps were the standout, with the gaining nearly 3% as traders bet on lower borrowing costs.
The catalyst was an inflation reading that undershot forecasts, easing fears that tariffs were feeding directly into higher consumer prices.
This has reinforced the market’s conviction that the Fed will ease policy next month. Futures markets are now pricing a near certainty of a September cut, with some traders betting on a half-point reduction after US Treasury Secretary Scott Bessent urged the central bank to move decisively.
I’m cautious about that assumption. Monetary policy expectations are one of the most changeable drivers of market sentiment.
A single data point – such as this Thursday’s US – could shift the conversation. If the data shows an unexpected pickup in price pressures, the Fed might take a more measured stance, and rate-cut bets could unwind quickly.
Similarly, the tone from policymakers at the Jackson Hole symposium later this month will be closely watched. If they choose to emphasise caution rather than urgency, markets could have to recalibrate.
Another reason for restraint is that earnings don’t yet tell the story of a powerful, broad-based market upswing. Consider Tuesday’s after-hours move in Cava: the stock plunged more than 22% after the company reported revenue growth below expectations and lowered its full-year outlook. In a truly robust bull market phase, we’d expect to see most companies beating forecasts and raising guidance across a variety of sectors. Right now, there’s still an unevenness that suggests not all parts of the economy are firing at full strength.
Beyond the US, the global environment introduces further complexity.
Europe’s economic recovery remains patchy. Germany, the region’s industrial engine, is struggling with weaker manufacturing demand, while southern economies are experiencing uneven consumer activity. The European Central Bank is also under pressure to balance inflation control with the need to support growth – a difficult line to walk.
In Asia, market performance has been volatile. China’s growth trajectory is under scrutiny as policymakers navigate a delicate balance between stimulating the economy and avoiding further financial imbalances. Japan has been one of the stronger performers in the region, but the yen’s fluctuations and the Bank of Japan’s gradual policy shifts have kept investors on edge.
Geopolitics adds another layer of uncertainty. US-China trade talks are continuing, but tensions remain high, particularly around technology and semiconductors.
Any escalation could quickly hit global supply chains and dampen investor sentiment. Elsewhere, energy markets are sensitive to developments in the Middle East, where political risks can feed directly into commodity prices.
When you combine these factors, it’s clear that the current rally, while encouraging, rests on a foundation that is far from unshakable.
For investors, the challenge is to balance participation in the upside with protection against downside risk.
This means assessing whether gains are driven by lasting improvements in earnings and economic resilience, or whether they are being inflated by temporary conditions. It also means thinking ahead to what could disrupt the current optimism – whether that’s an inflation surprise, a change in central bank rhetoric, weaker earnings, or a geopolitical flashpoint.
I’m not suggesting stepping away from markets entirely. There are still opportunities to be found, especially in areas where valuations remain reasonable and the growth outlook is supported by genuine demand.
However, selective exposure is key. Chasing record highs without a clear view of what’s driving them can leave investors vulnerable to swift reversals.
August rallies have a particular allure. They can feel effortless, especially when the news flow seems to align with investor hopes. But history shows they can also be among the most short-lived. When volumes normalise and autumn brings a heavier calendar of data releases, earnings reports, and policy decisions, markets often reassess.
My message is straightforward: enjoy the gains, but don’t mistake this for an all-clear signal. The global economic and political backdrop remains complex, and the current market strength could fade quickly if just one of the risk factors in play asserts itself.
The best way to approach this environment is with a combination of realism, advice, flexibility, and a willingness to act if conditions change.